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Absolute Return Podcast #45: Lower For Longer: Will Today’s Dovish Central Banks Ever Hike Interest Rates?

By December 16, 2019 No Comments
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December 16, 2019—Rock Bottom Interest Rates to Remain as the Fed and ECB Keep Rates Steady. Will They Ever Hike?

Legendary Central Banker Paul Volcker Passes Away While BoC Governor Stephen Poloz Passes the Torch. Who’s Up Next at the Bank of Canada?

Saudi Aramco Hits 2 Trillion Valuation After IPO. Was its Price Manipulated?

Boris Johnson Wins UK Election, Declaring Brexit a Certainty. But Will it Actually Happen This Time?

A Discussion on Why Merger Arbitrage Deserves a Spot in Investor Portfolios.

Transcript

Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by accelerate financial technologies. Accelerate because performance matters. Find out more at www.Accelerateshares.Com.

Julian Klymochko: Welcome Investors, traders, podcast listeners to episode 45 of The Absolute Return Podcast, I am your host, Julian Klymochko.

Michael Kesslering: And I’m Mike Kesslering.

Julian Klymochko: Today is Friday, December 13. Well, Friday the 13. Are you superstitious? Maybe not superstitious, just a little stitious. Nonetheless, some key market moving events that we wanted to touch on this week.

    • Starting with rock bottom interest rates remaining as the Fed and the ECB kept rates steady in the respective announcements this week. Are they ever going to hike interest rates?
    • Legendary central banker, unfortunately, passes away. Paul Volcker, we are going to chat about what he did in the late 70s and early 80s that was so notable.
    • Also, Bank of Canada Governor Stephen Poloz. He is set to patch the pass the torch as he is going to step down as governor next year. Who is up next at the Bank of Canada?
    • Saudi Aramco, they officially hit their much desired 2 trillion dollar valuation after their recent IPO this week. Was their stock price manipulated?
    • Boris Johnson, some more Brexit news. He won the U.K. election and declared Brexit a near certainty. But will it actually happen this time?
    • Lastly, we are going to discuss why merger arbitrage deserves a spot in investor portfolios.

Federal Reserve

Julian Klymochko: Some central banking news this week with the Federal Reserve choosing to hold interest rates steady at its meeting. This was really in line with market expectations. Their rate setting committee voted 10 to zero to lead the central bank’s benchmark rate in a range between 1.5 percent and 1.75 percent. Now, this is the first unanimous vote at the Federal Reserve since May. Typically, there is disagreements recently with the recent rate cutting. There has been some Fed members. That wanted to leave rates higher and not cut, but since there is staying steady now, it is a unanimous 10 to 0 decision. Fed officials, they also indicated their desire to keep rates on hold throughout 2020, opting to see inflation rise to a material amount before hiking rates. Now, after lowering rates at their previous meetings earlier this year to guard the U.S. economy from the effects of trade tensions and potential global slowdown, Fed officials indicated comfort with leaving monetary policy on hold throughout this year and next year 2020, while keeping an eye on inflation, economic growth, etc. But most see the Fed raising rates once, or twice after 2020.

I think that they are going to be on hold for a while. Looks like they are going to keep rates between 1.5 to 1.75 percent for the next while. So if you have any sort of, you know, floating rate debt that’s linked to U.S. interest rates, then it can be relieved that you’re not seeing that go up anytime soon. Got a couple of quotes from Fed chair Jay Powell. He indicated that inflation is barely moving, notwithstanding that employment is at 50-year lows and expected to remain there.  The need for rate increases is less. He also stated our want to see a significant move up inflation that is also persistent before raising rates to address inflation. What do you think of a recent policy decision at the Fed

Michael Kesslering:  You know, they do mention that they would want to see a significant increase in inflation, that only that would warrant an increase in interest rates. I mean, the last CPI output that they had this past week was I believe it was 2.1 percent annualized. It is above their target range slightly. Now, their use when they were, you know, decreasing rates, inflation was at like the 1.6, 1.7 percent range. Now it is slightly above. I don’t really foresee them having the same amount of haste to increase rates on that side. There is not symmetry is what I am getting at, I guess.  Any of the Fed watchers, they don’t believe that there’s going to be any raises in the next in couple of years. I guess that will remain to be seen. The Fed does seem to be quite dovish in that regard.

Julian Klymochko: Yes. Certainly, there is an easing bias. And they’ve even discussed potentially letting the economy run hot, i.e. having inflation average above 2 percent for a material amount of time, still working off the effects of the global financial crisis 10 years ago. They are pretty skittish in hiking and tightening monetary policy too quickly or to a level that the economy can’t withstand, which clearly happened in late 2013. They were hiking rates, you know, or running off the balance sheet and tightening monetary policy. And you saw some negative data, some negative economic data, not to mention the S&P 500 dropping down 20 percent into a bear market. So certainly they are cognizant of having that easing bias and not tightening too much as they did last year. So certainly here, they are going to leave rates on hold for now. And speaking of leaving rates on hold. You got some news out of the ECB.

Christine Lagarde, she kept the European Central Bank’s policy interest rate unchanged. Now, this was their first meeting as the bank’s president taking over from the now retired Mario Draghi. She cited muted inflation pressures and weak economic growth in Europe for her decision to hold rates steady. However, this was really a consensus call. No one is expecting rates to go up in Europe anytime soon. After years of negative rates and more than 2.6 trillion euro of ECB, bond purchasing. Eurozone economic growth still remains sluggish after what seems like at least 10 years of these economic stimulation measures and inflation here.

The same old story that you are seeing in the US as well, with inflation well below their objective target. Now, many doubt whether the ECB can lose them monetary policy further or if it is running out of ammunition after cutting rates to a record low of this negative 0.5 percent. In addition to that, they realize their bond purchasing earlier this year. So they are doing a significant amount of easing, an extremely, extremely easy monetary policy, much more so than the Federal Reserve. The Fed has rates 1.5 to 1.75 percent, which is low. However, it is part positive. Now you have the ECB at negative 0.5 percent, which to me. These negative rates just seem to be pushing on a string with little to no effect. What are your thoughts?

Michael Kesslering: Yeah, absolutely. As you had mentioned kind of pushing on a string. I do find it interesting that, yeah, they are really not going to have much for ammunition in a downturn as well. One piece in the announcement from the ECB was that they forecast inflation to be 1.6 percent by 2022.  My initial thoughts on that are just that an inflation target 2 years out seems just a bit ridiculous and seems like kind of a pointless exercise. But as well, one other aspect just specific to Lagarde is, she is coming in to the ECB, being well-known for a very good communicator, and that is a central job characteristic as we will talk about Poloz later in this podcast. That is a central job of this position to communicate with markets regarding the policy. One other thing that she is, you know, setting out upon is a strategic review of the ECB policy in general.

Typically central banks, they do their policy reviews semi-regularly, like the Fed and BOC currently are undergoing a review of their mandate. The ECB has not done so since 2003. Their current mandate is simply price stability and sustainable growth, which is the typical mandate of a central bank.

Julian Klymochko: That is what they say, but as we know, we think there is a third mandate, which is, S&P 500 is targeting. They like to see the stock market go up and they like to you know, juice those returns.

Both Speakers: Certainly.

Julian Klymochko: The leaders of the country. Enjoy that as well.

Michael Kesslering:  Absolutely. The interesting aspect of this strategic review is that she is now looking to potentially add climate change, cryptocurrencies. And overall economic inequality to as not Peller mandates, but kind of a sub mandate of the ECB, which seems very odd to include these and kind of muddles the proposition of a central bank and whether they are the best avenue to combat some of these issues. Nobody is debating that, the important nature of, say, climate change. But is the ECB the one that should be challenging this?

The other interesting aspect that I just took away from her initial press conference was I believe that she describe herself that she doesn’t see herself as dovish or hawkish, but is a self-proclaimed owl, which she associates with a little bit of wisdom, which is just a very interesting interpretation.

Julian Klymochko: Yeah, I thought that was an interesting comment from her on that one. Now, I just wanted to look at central bank actions from, say, a twenty thousand foot view. You look what is happening. So ultra-loose monetary policy, negative rates in Europe. You are having rock bottom rates nearly in all developed economies. Meanwhile, inflation is low. However, you are having quantitative easing bond purchases, stock markets are at record levels, and the economy is doing fantastic. Specifically in the U.S., you figure this is the time to perhaps ease off the accelerator pedal. But it seems like central bankers are pretty keen on keeping the party going and not slowing down whatsoever. It kind of reminds me of the environment of the late 90s where you had Alan Greenspan, who kept on monetary policy too easy for too long. We saw kind of what happened after that. You had the big tech bubble where money was too easy flowing into technology stocks and the outcome of that was not pretty. Then after that, the housing bubble where interest rates were kept too low, spurring too much housing demand. And you saw what happened to that. There are negative aspects that can occur from keeping monetary policy too easy for too long. And certainly my concern here, if you look in the market action, how much stock markets have rallied, how much even bond markets have rallied, pretty much all asset classes. Meanwhile, 10 years after the global financial crisis, central banks are still as simulative as ever. Interest rates are rock bottom and its pretty much QE to infinity and it does not seem to be stopping. It makes you curious and a little concerned on what is yet to come.

In contrast to having a policy that is too loose, the exact opposite situation happened with former Federal Reserve chairman Paul Volcker.

Paul Volcker

Julian Klymochko: Unfortunately, recently passed away this week at the age of 92. Now, he led the Federal Reserve between 1979 in 1987, and he is actually very well regarded. These remembered for breaking the back of U.S. inflation in the early 1980s by hiking interest rates to unprecedented levels.

He began as the chairman of the Fed when inflation was nearly 12 percent, which in this current environment that’s kind of unfathomable, fashionable. But that’s really where things were. Back then, he became known as his Saturday night special on October 6, 1979, which was can you believe it? A Fed action on a Saturday. Nonetheless, he presented a series of measures intended to squeeze inflation. It was really his mandate to beat back inflation and get it down to a reasonable level.

Now initially started with a 1 percent interest rate increase, so that’s one hundred basis point hike right off the top. When you think about what they do now, it is very, very measured in terms of hiking rates by 25 basis points each time he just went out on a Saturday night with a 1 percent hike. Then this raised the policy rate to twelve percent, which was nearly tenfold the current rate that is out there currently. This was not even the most dramatic thing he did. That was actually the Fed’s shift to focusing on limiting money supply growth, which meant interest rates climbed as high as 20 percent, which is just unfathomable. At this point, I remember being as a kid, my parents, you know, a kid in the early 80s born that time my parents open me interest rate account and I can still remember the numbers of two accounts, one 10%, one 15% on these cds for 10 years. That is pretty exceptional to get that in a bank credit union savings account. Meanwhile, you try that these days, you are lucky to get 1 to 2 percent. And so that’s really something to think about just back then, especially if you’re a fund manager, you could just go and buy bonds and go to the beach here.

Your job is effectively damn near guaranteed double-digit interest rates. Back then, no one really wanted to buy bonds because they expected rates to just keep going higher and higher and higher. It is like these days the exact opposite where no one wants to sell bonds because people are expecting rates to go lower and lower and lower, perhaps even negative. However, you know, these things change, right.

Now during his tenure, the U.S. economy actually went into recession twice. The jobless rate climbed to ten point eight percent in 1982. Bad loans and bankruptcies soared. It was kind of a disaster as super painful period for people to go through. Homebuilders and farmers protested. Congressional leaders, including various senators, they actually introduced legislation aimed at requiring the Fed to lower interest rates. Now, these bills were not adopted, but it goes to show you that. Take, for example, these days President Trump’s pressure on the Fed and Jay Powell is nothing new. It has kind of been happening since the dawn of the Federal Reserve. You had this political pressure from politicians to tilt rates in kind of whatever way they thought would benefit them. Interesting fact is that Volcker was even assigned a bodyguard after a man entered the Fed building in Washington with a sawed off shotgun, a revolver and a knife. He actually faced physical threats on his life for hiking interest rates. So he is really well-regarded now after the fact because he got interest rates. I mean, inflation using interest rates, got inflation down to a reasonable level and really set off a 40-year bond bull market.

Michael Kesslering: Yeah. The bodyguard aspect is very surprising just because he was 6 foot 7. So he is a very imposing figure both physically, but also from his intellectual capacity and from a policy standpoint. He was very firm, you had mentioned about the pressure put on, you know, central bankers from politicians and it being nothing new. Now, during his time, he had a lot of pressure on him from the Reagan administration. He really fought back, which is, you know, looking at the Fed. Currently, you know, where it would be really nice to seize a very strong figure like that in the current role. But. You know, he was America’s first celebrity central banker that everybody knew who Paul Volcker was.  Even before that, he was actually the Treasury Secretary, known for ending the convertibility of USD to gold, the gold standard, and which also effectively ended fixed exchange rates, so even before that. But as well, he was also known as one of the few central bankers that was actually a practitioner as before even the treasury secretary role. He starting out his career. He was writing loans himself. He had a vast amount of experience where he was not just practicing economics from an ivory tower. He actually had experience in the credit markets. And when you were dimensioned with all this rapid inflation in the late 70s and into the 80s, what he identified, was just that there was a large excess of credit in the markets and he made moves to fix that issue, which is he’s just a very interesting figure. And it’s unfortunate with his passing that, you know, it just reminds us of all the great things that he’d had done in the past that weren’t necessarily popular at the time.

Julian Klymochko: Right and he was so well regarded after that. The Obama administration actually brought him back to be involved in establishing what is now known as the Volcker Rule, limiting proprietary trading at U.S. banks. His name really lives on through his policies and these new rules governing bank, so certainly a very memorable figure.

Stephen Poloz

Julian Klymochko: In addition to that, central bank action up north with Bank of Canada Governor Stephen Poloz, he announced that he will step down when his term ends next summer. He has been governor of the central bank since 2013, so he has served quite the long term.

Now there is people speculating on who is going to replace him. I think the most likely candidate is his right hand woman, Carolyn Wilkins. Now, she has really been the number two at the Bank of Canada since 2014, really seems to be groomed for the job. She is currently the senior deputy governor at the central bank. She seems to be the most likely candidate, in my opinion, but I guess we will see at the time.

Michael Kesslering: Yeah, absolutely. It would be an interesting move just because when Poloz was hired, he was viewed as in the running. He definitely was not viewed as the most popular candidate as he did come from the export side. I belief it was with Export Development Canada. He has had a very interesting run as far as Bank of Canada governor. I mean, when he did begin, he was criticized for his communication style, as we are discussing with Lagarde. They brought in somebody that was known as a very good communicator at the ECB.

Julian Klymochko: Right, and why communication is so important is because the market doesn’t like getting caught off guard. I remember he did have some dovish comments that the market did not like because they were pretty dramatic moves in the currency. The Loonie just tanking early on when he came out with some unexpectedly dovish comments.  Certainly is important to communicate any future policy moves, and that is really how investors have been trained on these.

Michael Kesslering: Absolutely, and one other thing that was, I guess, unique for a central banker with Poloz was that he was known for being quite close with Canadian CEOs. I don’t mean that in a negative kind of chummy way, more so just having regular meetings with industry CEOs where he was able to check the pulse of Canadian business rather than just simply working through economic models. He did have a bit of a boots on the ground approach to being a central banker as well. One last thing is that he has always been very critical of consumer debt, something that most central bankers don’t really worry themselves with, but something that is hopefully carried on with his successor as those are becoming quite high in Canada and something that the BOC would make sense for them to pay attention to moving forward.

Julian Klymochko: Yeah, certainly and they paid a lot of attention to the housing market as well. In addition to the consumer debt piece, they are concerned about mortgage debt, really just an over levered Canadian consumer. If you take into account auto loans, credit card debt, in addition to mortgage debt, they are really reliant on these rock bottom interest rates. If rates were to go up, I think the central bank gets quite nervous in terms of what will that do to the economy. Nonetheless, Poloz has done a pretty good job over his term, so we will stay tuned to see whose next.

Saudi Aramco

Julian Klymochko: Wanted to wrap up our coverage of Aramco. Now Saudi Arabian Oil Co. Also known as Aramco. Their shares were listed the officially IPO this week on the Riyadh Stock Exchange at a 1.7 trillion valuation, as we previously discussed. How important was it for the Saudi leader, Crown Prince Mohammed Bin Salman, to get this 2 trillion valuation? Well, it was extremely important. And after two days of trading, guess what happened? It reached 2 trillion dollars. First day it closed limit up on the Saudi stock exchange. Actually limit market moves to plus or minus 10 percent on the first day went up 10 percent. Not very many shares traded and also rallied on the second day to achieve the 2 trillion valuation, which in my opinion was largely a political move.

This whole IPO is really the centrepiece of the Crown Prince’s vision for diversifying the kingdom away from its oil dependence. Now this IPO raised twenty five point six billion dollars. Are you going to use that to try to develop other industries? However, this was well below their plan from three years ago to raise as much as 100 billion in a blockbuster international IPO. Now, this IPO ended up being only domestic. They scaled it back pretty dramatically after overseas investors balked at the proposed valuation and only one point five percent of Aramco ended up being offered to the market. But with such a small float and we’ve discussed in the past on the podcast on these low float IPOs and how they’re prone to market manipulation, because you don’t have a lot of sellers, you don’t have a lot of shares trading, and there could be a supply demand imbalance pushing the price around. In my opinion, this IPO at pretty much the smallest float ever, 1.5 percent. The holders are all pretty much domestic investors who were urged pretty imminently from the government not to sell their shares. So what happens when you limit the supply of shares and they are pushing investors to buy into the IPO after its trading while the price is bound to go up? Right.

Michael Kesslering: Absolutely and in terms of when you talk about the supply, demand in balance was it was very much a strategic decision to do this. When they were gathering bids for the demand for the investment bankers doing this and the IPO process. The average institutional investor received only 16 percent of their bid in the IPO allocation. If they wanted the rest of that allocation that they had demand for, they would have to go out into the market in the first couple of days of trading. So about 84 percent of what they had initially said they wanted would have to be bought on the open market. That is just a typical strategy, like over an oversubscribed offering. It is just a typical strategy used by an investor bag to ensure that the share price increases after the IPO.

Julian Klymochko: Get that IPO pop.

Michael Kesslering: Absolutely. However, Aramco really is not the one capturing that value since theoretically they could have been able to price it at a higher rate and just be one time subscribed to, let’s say, rather than being sold like almost six times oversubscribed.

Julian Klymochko: Nonetheless, many remain sceptical, as do we, of the robustness of this company’s two trillion dollar valuation. Number one, very few shares traded that. I always make the joke that I could invent a crypto currency called J-coin and make a billion of them and sell one to you for $1. Then, hey, I am a billionaire. But, you know, it’s not really believable. In addition to not very many shares being traded. This was really a point of pride in Saudi Arabia, for example, was front page news in mainstream media there with headlines such as Aramco at the top of the world and a dream come true, which, you know, really goes to show you how important getting to that arbitrary 2 trillion dollar number was. To their credit, they made it happen. However, international investors, they put Aramco value on average around 1.36 trillion. So based on that estimate, it’s roughly 50 percent overvalued. You had some hedge funds subscribing to the IPO. Now flip it after each 2 trillion because in their opinion it is kind of guaranteed to go there. After it gets to that goal of theirs, how can it go up anymore more rights? The goal is 2 trillion, so they are sellers there and if you are holding that stock, then perhaps it is a good time to consider that strategy.

Brexit

Julian Klymochko: Across the pond, we had some Brexit news with Boris Johnson, also known as BoJo. His Conservative Party won a decisive election victory, clinching a healthy majority to govern in the UK. Now, Johnson declared, quote, a new dawn in Britain while claiming with certainty an exit from the EU in January, stating no ifs, no buts, and no maybes. So there you have it Johnson winning the election, declaring Brexit in January as a near certain or perhaps a certain event. Now, what happened? To summarize the conservatives, his party, they won three hundred and sixty five seats. Now, this gave them a majority of 80 seats in the House of Commons. Their best showing since 1987. And this is really giving them the mandate to move forward with Brexit effectively, you know, the clearest thing that they needed to exit from the European Union.

He promised. Johnson promised to bring forward this Brexit legislation before Christmas with a view of Britain leaving the EU on January 31. So that’s the next key date. We have had a number of Brexit deadlines that have lapsed. Nothing has happened, but this one, in my opinion, looks fairly high probability that it’s actually going to happen. However, in my opinion the work starts then, right? The real slog in negotiating a trade deal with other countries in the Eurozone block, it will truly begin at that point.

Nonetheless wanted to talk about some market action. What happened here was you had a big rally in the currency. The pound jumped to its highest level against the U.S. dollar in about a year and a half. Shares in the London Stock Exchange rallied hard. The Footsie 250 index of UK insurance jumped 5 percent. What happened was all that uncertainty really came off the table. As you know, the market really dislikes uncertainty. With that being pretty much definitive and what’s going to happen, Brexit is going to happen at this date. No hard Brexit, hard Brexit is off the table, which would have been absolutely disastrous. You had a jump in asset prices, right. Because that provides certainty to investors.

Michael Kesslering: Yeah, absolutely. With this, I mean you had mentioned some of the market action, but just as a background as well. This is the biggest Tory Majority since Margaret Thatcher’s in 1987. And as well, as you had mentioned, that the negotiation of a trade deal now begins and already Trump has been involved. He did have a tweet out to Boris Johnson congratulating him and mentioning that the U.S. is now very open to negotiating a trade deal with Britain. That will be interesting to follow, but the key piece for Britain is to negotiate that trade deal with the rest of the Eurozone.

Blog Post

Julian Klymochko: But out a blog post, this week titled why merger arbitrage deserves a spot an investor portfolios. Now I was reading some interesting data that was released this week in JP Morgan’s guide to alternatives that actually showed the previous returns every year since 2009. Various hedge fund strategies and various asset classes including global stocks and bonds. As everyone know, since 2009 equities have done tremendously well with a huge rally and global equities did have the highest return. However, it is important to note that although they did have the highest return they did not have the best performance. Now this may confuse some people but when I speak of performance, I talked about risk-adjusted return. If you look at global equities to get that 10 percent annualized return that they had since 2009 you had to put up with some pretty significant volatility. Fifteen point six percent annualized standard deviation and that actually brought the three bear markets meaning declines of 20 percent or greater. You had that in 2011, 2015 and 2018 so it is important to look at return per unit of risk or volatility and if we look at that versus various hedge fund strategies nearly every hedge fund actually beat global equities since 2009 despite what the media tells you. If we look down the list return per unit of risk the top ranking strategy is merger arbitrage.

Now we only had an annualized return of four point one percent, which is obviously lower than global equities at 10 percent annualized. However, this came with a standard deviation of only 2.5 percent, which gives you a return per unit of risk of one point six four, which is nearly triple the risk adjusted return of global equities, which was only zero point six four. Other hedge fund strategies that beat global equities on a risk adjusted basis you had relative value market neutral distressed that even the hedge fund index beat it and long short equity. The only hedge fund strategy that failed to beat global equities or global bonds on a risk-adjusted basis was global macro, which has had quite the poor showing over the past decade, which is why you have seen a lot of those fund managers close up shop. The most recent one being Moore Capital. I also wrote about merger arbitrage as asset class and this, has been a strategy that has been around forever. If you read about old trades that Ben Graham is to do in his Graham Newman partnership back in the day that Warren Buffett first worked for they were doing arbitrage trades. Warren Buffett has been a practitioner for over 50 years. I was reading an old article from 1988 when he was running Berkshire Hathaway back when he was smaller and could afford to do a lot of these merger arbitrage trades he actually earned a 53 percent rate of return in 1998 from his merger arbitrage investments.

However, returns had been compressed pretty significantly since then. Assets have really come into the space. If you look five years ago, there is about twenty four billion invested into merger arbitrage funds now five years later there is seventy one billion so growth of nearly 3x. It is becoming a lot more popular institutionalized and standardized becoming a part of many institutional portfolios certainly. But you’re starting to see that trickle down to the advisor and even the retail portfolio. The other comment that I made in this blog post was the aspect of active versus passive. Typically, that is spoken about from a long only equity basis and that is a really important argument because the vast majority of fund managers. I’m talking about 90 percent have failed to beat the passive S&P 500 or any other benchmark index over the long term and the near term as well. And that’s why you’ve seen such a flood of capital into S&P 500 index funds whereas passive holdings of equities have now exceeded active for the first time ever which is a huge sea change you’re seeing massive pressure in the mutual fund space. These long only managers just really getting crushed and so it’s really well regarded fact that passive beats active over the long term. However there is a passive benchmark in merger arbitrage and if you compare that to active, active managers really crushed it.

I mean it is not even really close. The S&P merger arbitrage index got beaten by the HFRI merger arbitrage index which is just a collection of merger arbitrage funds. They got beat over 3, 5, 10 years and even since inception since 2006 by nearly 100 basis points and so the main point here is that merger arbitrage it pays to be active. You cannot really earn the best returns as you can on the long lonely equity side of beating the benchmark or lack of beating the benchmark in merger arbitrage. It typically is where it is worth it to pay up for active management because typically you see higher returns from that perspective.

Lastly, I just wanted to touch on kind of the risk reward profile of merger arbitrage you get that sort of 4 to 5 percent annualized return with a really low volatility and it produces this yield that investors really crave. So it can be compared as a good alternative to fixed income to bond type strategies especially if you are concerned about interest rates going up because merger arbitrage does not have that exposure to long-term rates. Like you don’t have that duration risk. The other main advantage is the vast majority of the yield from merger arb is through capital gains, which typically can be taxed more efficiently than the interest income generated from bonds.

And that’s about it for episode 45 of The Absolute Return Podcast. If you liked it as always, you can listen to more episodes at absolutereturnpodcasts.com. If you really enjoyed it, please leave us a review and tell your friends co-workers colleagues etc. As for us, we are taking a bit of a podcast hiatus for the holidays so we will likely be away for the next couple of weeks working harder than ever. If you want to hear from us catch us on Twitter, LinkedIn in any of the social media, send us an email. We will be at the office but no podcast until early January so until then we will chat with you soon. Happy investing.

Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.

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